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What is an item of property?

The Tax Court held the IRS properly recharacterized income generated
from the rental of semi truck tractors and trailers as nonpassive
under the self-rental rule, since each tractor or trailer was
considered an item of property under Regs.
Sec. 1.469-2(f)(6).

Generally, taxpayers’ passive losses are currently deductible only
to the extent of their passive income. Rental activities are generally
considered passive; however, any net rental income generated from
renting an item of property to a business in which the taxpayer
materially participates is considered nonpassive under the self-rental
rule of Regs. Sec. 1.469-2(f)(6).

In 2005, Joseph Veriha was the sole owner of, and materially
participated in, John Veriha Trucking (JVT), a trucking company in
Wisconsin. In addition, Veriha was the sole owner of JRV Leasing LLC
(JRV) and owned 99% of the stock of Transportation Resources Inc.
(TRI). JRV and TRI generated all of their income in 2005 by leasing
semi truck tractor and trailer units to JVT. Each individual tractor
unit or trailer unit was rented under a separate lease agreement to
JVT. Because of the leases in 2005, TRI produced a net profit, while
JRV had a net loss. Veriha and his wife treated the net profit from
TRI and the net loss from JRV as passive on their 2005 joint tax
return and thus netted the loss against the income. The IRS
recharacterized the net profit from TRI as nonpassive income under the
self-rental rule and assessed a deficiency of $258,785. The taxpayers
petitioned the Tax Court for relief.

The taxpayers argued that the entire group of all tractors and
trailers owned by both JRV and TRI should be treated as a single item
of property for purposes of the self-rental rule, while the IRS
maintained that each individual tractor or trailer was an item of
property. Since the term “item of property” is not defined in either
the Internal Revenue Code or regulations, the court held the ordinary
meaning of “item” should be used, and that it meant “a separate thing
that is part of a larger collection.” Therefore, the court concluded
that each individual tractor or trailer was a separate item of
property for purposes of the self-rental rule and that the net income
from TRI was nonpassive. The taxpayer argued that, often in the
trucking industry, the phrase “item of property” means an entire
fleet; however, the court found this implausible and further stated
that it appeared that JVT, TRI, and JRV viewed each tractor or trailer
as a separate unit of property, since they were owned by two separate
companies and a distinct lease agreement was written for each tractor
and each trailer.

While each tractor or trailer leased by TRI was held by the court to
be a separate item of property, the IRS did not object to the
taxpayer’s netting the profitable leases against the unprofitable
leases within TRI or JRV. Thus, the court treated only TRI’s overall
net profit as nonpassive, which was more favorable to the taxpayer
than treating the income from each lease of the two companies as nonpassive.